Magazine

How To Afford Parental Leave & Some Time Off

By Sallie Krawcheck

October 10, 2016

I took my first parental leave after I had my daughter. It lasted for two weeks. A few years earlier, when I was pregnant with my first child, I actually quit my job and didn’t work for nearly a year — I didn’t see another way to make it all work.

My kids are older now, and things may have gotten better for working moms since then, but not by much. Did you know that the U.S. is the only developed country in the world that doesn't require paid leave for new moms? And that only about 20% of large corporations offer paid parental leave? And moms only take, on average, 10 weeks of leave? (In case that didn't put flames on the side of your face, the E.U. mandates that all women receive at least 14 weeks of paid maternity leave.)

Yeah...helps explain why so many new moms have to use hacks — combining paid time off, short-term disability, and unpaid leave — to spend time with their new child(ren). And why so many moms don’t return to work.

When you’re on parental leave, you may take home less pay or none at all, but the bills, bills, bills keep coming.

Since the U.S. is so behind the times on paid leave, parental leave isn’t only about adjusting to life with your child, it’s also about adjusting to changes to your finances. On top of taking prenatal vitamins if you’re pregnant, filling out paperwork if you’re adopting, and generally freaking out over this whole taking-care-of-a-little-human thing, you’re preparing for, on average, 2.5 months with less money and more expenses. Which, from a numbers standpoint, seems like quite the problem to solve.

The math gets more complicated if you decide to forego leave altogether and take a career break instead. Your finances can stay strong once your kid arrives, though. Here are three tips to help you get started:

Find Out Parental Leave Policies

We already know that most employers don’t offer paid leave; and thanks to narrow criteria, many women aren’t eligible for the government-mandated 12 weeks of unpaid leave either. Talk to your HR department or check out Fairygodboss to understand how your company handles parental leave. Knowing early on how much time you’ll be able to take off is a must when you’re preparing your finances. (Knowing before you join a company is even better.)

Where you live can also influence your parental leave financial plan. Right now, only three states offer paid family leave. Definitely a small step in the right direction. Meanwhile, twenty-five states have added provisions to the federal unpaid maternity leave law so more mothers are eligible for time off, although it’s still unpaid in most states.

Kiss Expensive Debt Goodbye

Moms-to-be with credit card debt: Do not pass go, do not collect $200 until you take care of that plastic. Having credit card debt is stressful (and beyond worthless since you can’t even get a tax deduction for it, unlike a mortgage or student loans). Having a child is extremely stressful. Money stress + child stress = the worst. Paying off or refinancing your credit cards or any other high-interest debt has three big benefits: it reduces stress, it lowers your monthly expenses, and it frees up money during your leave.

When you’re on parental leave, you may take home less pay or none at all, but the bills, bills, bills keep on coming. Trimming as many expenses as possible beforehand is smart, and it makes parental-leave math (how to pay for X while having less $) more doable. Oh, and children and expenses go hand-in-hand, so having more money at your disposal for whatever random thing you’ll inevitably end up needing during your leave is great.

Build Up That Emergency Fund...And Invest

After you take care of that high-cost debt, then it’s time to start or increase an emergency fund. For an Ellevest Emergency Fund, we recommend saving at least three months of take-home pay. And we know you’re busy, so our algorithm in our financial plan does the math for you and suggests one-time and monthly contributions — based on your financial situation — you can make to reach that goal target. One less thing for you to worry about.

Parental leave is typically pretty short, so keeping money in a savings account makes sense. But if you’re planning on taking a long break (a year or so) and are a few years away from having children, investing — like with our “Kids Are Awesome” goal — may help you better prepare financially for many of the costs that come with raising them. Nannies, daycare, doctor visits...the list goes on. Also, investing could help you make up some of the money you lost during your career break — something saving can’t really do.

Here’s another thing to keep in mind if you’re planning on taking a career break when you have children: your retirement. Research shows that women tend to put retirement plans on the back burner when taking career breaks — and end up paying for it with their retirement savings. Sure, a couple of weeks without contributing during your leave isn’t the worst thing in the world, but a year, or two, or longer can seriously cramp your retirement planning style.

Let’s say you’re 30, making $85,000, and saving 20% of each paycheck. Five years later, you have a kid and decide to take two years off from work. Thanks to that career break, chances are you’ll take a pay cut when you go back to work. But because you’re into planning for your future, you continue to save 20% of each paycheck over the next 40 years and end up with an estimated $1.1 million in retirement savings.

This isn’t bad as far as retirement goes, though it’s less than the $1.5 million you could have had if you didn’t take that break (so no pay cut) and stuck to saving 20% of each paycheck. And it’s still less than the $1.9 million to $2.5 million we estimate you could have in retirement savings by Ellevesting in a diversified portfolio instead.*

Which brings me to my final point: Get an early start on saving for retirement and invest regularly (because compounding) in a diversified portfolio while you can. Our "Retirement On Your Terms" goal gives you a goal target and recommendations on how much to invest each month to help you reach it. Just so you know, that goal target factors in your salary and gender (because women’s salaries peak earlier than men’s and we live longer) to arrive at a figure that we believe works for you when you’re killing it as a grandma.

So maybe you’re years away from having a child, or maybe you plan on having one in the near future. No matter your timeline, the sooner you start sorting out your finances and investing in your future, the better your parental leave will be.

*We project Elle’s salary with and without a career break, using a women-specific salary curve from Morningstar Investment Management LLC, a registered investment adviser and subsidiary of Morningstar, Inc., which includes the impact of inflation. For the career break, we assume that Elle takes a 2 year career break in 5 years, and returns to a job paying 20% less than her salary at the time she takes the break. We assume no salary increase of any kind, including inflation, during the break. We add up her annual salary amounts under both scenarios over a 40 year period. $1.56M is the difference between the two sums.

We assume the bank savings account yields a 1% average annual cash return and has no account fees. For investing, we assume an investment with Ellevest using a low-cost diversified portfolio of ETFs beginning at 91% equity and gradually becoming more conservative during the last 20 years, settling at 56% equity by the end of the 40 year horizon. These results are determined using a Monte Carlo simulation—a forward looking, computer-based calculation in which we run portfolios through hundreds of different economic scenarios to determine a range of possible outcomes. The lower end of the results reflect a 70% likelihood of achieving the amount shown or better, and the higher end reflects a 50% likelihood of achievement or better. Results include the impact of fees, inflation, realized capital gains, and taxes on interest.

The projections of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.

Information was obtained from third party sources, which we believe to be reliable but not guaranteed for accuracy or completeness.

The information provided should not be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice.

The information provided does not take into account the specific objectives, financial situation or particular needs of any specific person.

Diversification does not ensure a profit or protect against a loss in a declining market. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.

Investing entails risk including the possible loss of principal and there is no assurance that the investment will provide positive performance over any period of time.

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